Has economic stimulus failed?

To be honest with you I don’t even like this conversation because people interpret my views as ‘left wing’ or some other ideological overlay. My personal views on politics and economics run quite conservative. I think government should stick primarily to the provision of public goods/services and anything where there is a viable ‘market’ should be left to the market. If there is a monopoly (no viable market), government should regulate but not necessarily have direct ownership. If it is something essential to the workings of society (a sector like energy) there should be a regulatory framework for the industry to protect citizens – but there is no inherent need for direct public ownership. To further bolster my right wing fanatic credentials, I think government transfers to individuals should be means tested. I don’t like government paying people for things they could afford themselves and I include a lot of health care spending in this as well (in my ideal model, people who could afford it would pay directly or through insurance for basic health care services and the public system would cover large costs – i.e. if you get cancer). This last one will come back to bite me if I ever decide to go into politics.

With that said, I dislike people who say that economic stimulus has failed. I guess the term ‘failure’ depends on how you define it but in straight economic terms if government picks up the slack in the private economy for a short period of time it does have the effect of supporting the economy (jobs, taxes, etc.). Governments running short term deficits should be viewed no differently than a firm or individual doing so. Obviously this can get out of control and there are credible folks saying the U.S. and much of Europe is reaching that point.

The crux of the issue is that some folks say that government spending actually crowds out private spending. In other words, they believe when the government increases spending, the private sector reduces spending so the net impact is negative.

There may be some crowding out effects but it is never that cut and dried. While I appreciate the view that wants to limit government spending, not all government spending is ‘bad’.

In my considered view, if government had not increased spending in the wake of the recession it would have been a lot worse – probably in the U.S. it would have ended up being a technical depression. However, there is truth to the view that coming out of the recession might take longer as a result of deleveraging. But then again, as we have seen, the markets are driven by emotion and a full scale depression might have created even more unintended consequences.

I will end by bringing in my right wing fanatic credentials, again. I do think that government policies in the U.S. created the housing bubble and much of the reckless behaviour in the financial markets. Even if you want to encourage home ownership there has to be sanity.

Canada’s housing and financial systems are much less dysfunctional than the U.S. and we didn’t feel the impacts of either bubble as much.

In the end, you will see more and more people crowing about the failure of economic stimulus and I guess turn about is fair play but in the back of our minds we have to ask ourselves if it would have been much worse otherwise.

One Response to Has economic stimulus failed?

Crowding out occurs when governments run a deficit (increase deb)t. Government debt is real debt; usually translated into bonds, and someone buys these bonds . The person (or organization) who buys them doesn’t put that money in a business. Voila… crowding out in three short sentences.

Governments can also handle their debts by printing money. This in turn dilutes all the cash everyone else has in their pockets. This seignorage “tax” increases the cost of everything, including future government operations. It can cause a vicious feedback loop that leads to hyperinflation.

The “multiplier effect” (in your note above, it would imply you are referring to the Keynesian) is when the government gets the money… all of it is spent. When a person gets the money, a portion is spent, and a portion is invested. Basic Kenysian effects. (and BTW not a universally accepted model)

In the specific case for New Brunswick… much of New Brunswick debt is floated as bonds, and picked up by foreign investors. New Brunswick can borrow at a very good rate (relative to start up business rates) and can then in turn distribute this to business through economic development, without crowding out the local investment cycles. Spent wisely, this borrowed money can be beneficial and spin off more economic activity that yields a greater return on taxes than was spent to get the cycle going. Spent poorly, and debt piles up as the failed growth initiatives do not generate new tax revenue. New Brunswick also runs a parallel sinking fund, which also means that the expense isn’t something to be dealt with in the future.

As long as politicians can demonstrate leadership and save in the good times, and only spend in the bad… then this approach can be a shock absorbing effect on the economy. But, alas, it seems that governments seem to continue to spend in the good times as well, especially incumbents in election year

As far as how New Brunswick is doing with all this? Well, there are many ways to analyze this; and I have been looking at a few empirical models around this. But that’s a much longer post